Evaluating a Companies Budget Procedures

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Tom Emory and Jim Morris strolled back to their plant from the administrative offices of the Ferguson & Son Mfg. Company. Tom is the manger of the machine shop in the company’s factory. Jim is the manager of the equipment maintenance department. The men had just attended the monthly performance evaluation meeting for plant department heads. These meetings had been held on the third Tuesday of each month since Robert Ferguson, Jr., the president’s son, had become the plant manager a year earlier. As they were walking, Tom Emory spoke. “Boy, I hate those meetings! I never know whether my department’s accounting reports will show or bad performance. I am beginning to expect the worst. If the accountants said I saved the company a dollar, I’m called Sir, but if I spend even a little too much- boy do I get in trouble. I don’t know if I can hold on until I retire.” Tom had just been given the worst review he had ever received in his long career with Ferguson & Son. He was the most respected of the experienced machinists in the company. He had been with Ferguson & Son for many years and was promoted to supervisor of the machine shop when the company expanded and moved to its present location. The president (Robert Ferguson, Sr.) had often stated that the company’s success was due to the high quality of the work of the machinists like Tom. As a supervisor, Tom stressed the importance of craftsmanship and told his workers that he wanted no sloppy work coming from his department. When Robert Ferguson, Jr. became the plant manager, he directed that monthly performance comparisons be made between actual and budgeted costs for each department. The departmental budgets were intended to encourage the supervisor’s to reduce inefficiencies and to seek cost reduction opportunities. The company controller was instructed to have his staff “tighten” the budget slightly whenever a department attained its budget in a given month; this was done to reinforce the plant supervisor’s desire...
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